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From television to theme parks to movies to toys, the Disney Entertainment Empire (DIS) covers virtually every media imaginable for consuming content. It was only a matter of time before the company embarked on the most recent and popular platform for multimedia content consumption: streaming services.
On April 11, Disney + was unveiled with great fanfare. The advent of Disney + raises new questions about the future of the venerable business. This service was long overdue, but its potential impact on Disney's business remains hotly debated.
Do you want to create a streaming service?
Disney's broadcast intentions have been well known for some time, as Epsilon Theory has said. Rusty Guinn noted in a recent article:
It certainly was not because people did not know about Disney's streaming plans. Disney has been extremely transparent about almost every detail throughout its development. We know that the service has been planning for years. We knew his name in November. We were aware of the massive investment in the content of the proprietary platform, the new vice president at the head of the group and the details of some individual programming scheduled for January. In the LexisNexis Newsdesk database, between March 31, 2018 and March 31, 2019, there were over 48,400 news articles, major blogs, press releases featuring Disney and streaming. "
Despite the long delay and the general lack of surprises regarding Disney +, Disney's shares jumped following the official unveiling. The stock is now trading 12% more than it was the eve of the advent of Disney +. This means that the market has added more than $ 20 billion to the value of the company virtually overnight.
So why did the market react as if it was a surprise?
I can not wait to be king
The Disney + announcement has been long and widely anticipated. Analysts received a series of upgrades from Disney before the announcement, and the overall outline of the service was well understood by CEO Bob Iger. pulled the curtain.
With so much already known, it was hardly a binary investment event. One would think that the reaction of the market would be positive, of course. But abundance has left many surprised. We are inclined to subscribe to Guinn's answer to this apparent enigma: price.
At $ 6.99 a month, Disney + will offer many other streaming services. It also contrasts with Netflix (NFLX), the largest and most original streaming platform, which has raised prices in order to fill its still-shrill financial gap.
A low initial price point makes sense as part of efforts to create a broad base of subscribers, and no one expects the price to remain as low as ever. But the price chosen has another meaning. It is certainly not a question of maximizing profits, and Disney probably intends to increase its futures prices.
But setting the initial Disney + price at such low signals indicates that Disney is here to compete for the streaming crown, not just to be a full-fledged company. It seems that Disney is throwing the glove at Netflix.
A brand new story
Disney + is more than just a content platform. It's not just a different medium through which you can watch and enjoy Disney branded content. On the contrary, it represents a fundamental shift in Disney's narrative as a business. The recent article by Guinn offers an excellent crystallization of this point:
Disney is creating a powerful speech that will take market share. Because Disney is creating Common Knowledge, it will dominate streaming. Because Disney wants you to know that everyone knows that this is now a growth stock – not in the sense of Russell's constitutive 1000 growth index, but instead of Netflix, Nvidia and Amazon meaning. "
In other words, Disney + is shaping the Disney company, transforming it from a company considered a profit-driven multimedia spinning machine with an unparalleled IP portfolio into a technology-valued company. very strong growth. If Disney succeeds in holding this revaluation, it could witness a massive re-evaluation similar to that of Netflix.
The wonderful world of profits
Some analysts and commentators are already jostling for the idea of "Disney as a service"But most do not understand how such a narrative change could impact stock prices.
It is here that the comparison with Netflix becomes important. The current king of streaming is valued at nearly $ 170 billion, a valuation entirely based on future expectations of monumental growth. Despite rising prices and limited competition from some riveting streaming services, Netflix still has not managed to break out of the red.
Disney, on the other hand, has a large, profitable empire, in addition to having the world's most valuable entertainment-related intellectual property. He can afford to subsidize his streaming service with relative ease if he wishes. But that's huge pricing power, proven time and time again on many platforms, could well mean that it does not have to absorb losses from Disney + to compete for the dominance of streaming – not for long anyway.
Investors' point of view
At $ 233.36 per share, Disney has a market capitalization of nearly $ 240 billion and trades for just over 18 times its earnings. It's not exactly cheap, but it's not horribly expensive either.
However, if the new discourse materializes, the current valuation may soon look very cheap. Let's not forget that last May, Netflix surpassed Disney, even briefly, to become the most valuable media of the United States.
If Disney manages to capture some of the technological fairy dust that has propelled Netflix to dizzying heights, it could be the subject of a radical re-evaluation of the market. If Disney can play a credible role for the streaming crown, crushing Netflix or not, the company could end up with much more generous price targets.
Disclosure: I / we have / we have no position in the actions mentioned, and do not plan to initiate a position within the next 72 hours. I have written this article myself and it expresses my own opinions. I do not receive compensation for this (other than Seeking Alpha). I do not have any business relationship with a company whose actions are mentioned in this article.
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